The effects on the American psyche of massive 20+% unemployment can only be known after the fact. Sheltering in place, if deemed to be needed, for another 2 or 3 months may prove that “cabin fever” is as damaging as the virus.

I wish I had a crystal ball but in lieu of one I’ll watch and wait for the spread of the COVID-19 virus to be contained. Hopefully biotech research will find a treatment and ultimately a vaccine but much testing still needs to be done. My layman’s reading of what’s needed to effectively flatten the curve and reopen the economy, is more testing to determine who is infected and where new hot spots will emerge and blood tests (serology) to determine who has developed antibodies through exposure to the virus.

In the 7 previous bear markets that I’ve experienced, the leveraged institutions contribute to the 1st wave down as margin calls and, now, computer algorithms accelerate the decline. Then we see analysts looking for a bottom and a retest, which is what I’m hearing now. As long as investors are still looking for a bottom and seeking bargains the final lows have not been seen.

Here’s The Risk For Investors

In a headline driven, existential health crisis like we are experiencing, human emotions play a big part in the ultimate outcome. We won’t see a buyable low, in my view, until the public stops looking for a bottom and throws in the towel. Call it despair if you will, but it’s what has created every bear market low that I have seen, except for 1987.

Crude oil rallied 30% last week on the hope that President Trump can broker a truce in the price war between Russia and Saudi Arabia. While the hoped for 10 million barrel a day production cut might happen, the two oil titans are already sniping at each other and the virtual OPEC meeting has been delayed a few days.

I believe that the rally in energy stocks this past week is an opportunity to exit weaker holdings, because only the strong are likely to thrive going forward. Even if supply is cut where is the demand going to come from?

As we head into 1st quarter earnings season which begins on 4/14 when the major banks report, we are likely to see very few companies go out on a limb and forecast their future results. Thus valuations for the stock market will be virtually impossible to conjure up. If there is no “E” in P/E ratios how can value be determined? In the unreality of an economy shut down to battle a war against an unseen enemy, economic forecasts are just bad guesses. 

Initial projections on 2020 GDP from the major investment banks ranged from down 20-30% in the 2nd quarter and a “V” shaped recovery beginning in the 3rd quarter. Two major banks are now projecting negative GDP growth in Q3 based on uncertainties on when the economy will restart and what demand will look like when it does reopen for business.

What Should An Investor Do Now?

Until the spread of the COVID-19 virus peaks and we are closer to a reopening of the U.S. economy, sell rallies and sit on your cash.

If we are fortunate to see an effective treatment there will be plenty of capital gains opportunities. For me capital preservation is more important than capital gains.

Use sharp bear market rallies, like we saw last week, to raise sufficient cash to enable you to withstand further declines without panicking…in other words sell down to your sleeping level on rallies.

What Do Historic Patterns Suggest Going Forward?

Stocks are in a bear market, having experienced a jaw-dropping 34% decline in just 4 weeks. Let’s look at some historical examples to get a handle on what to expect going forward.

First let’s look at all bear market declines going back to the great depression.